Tips and Traps on  the Canada Emergency Wage Subsidy (CEWS) Crowe BGK

Tips and Traps on the Canada Emergency Wage Subsidy (CEWS)

Crowe BGK
1/25/2021
Tips and Traps on  the Canada Emergency Wage Subsidy (CEWS) Crowe BGK

The Canada Emergency Wage Subsidy (CEWS) provides a welcome support to a large number of Canadian employers who saw their revenue decrease as a result of the COVID-19 pandemic. Crowe BGK previously published detailed summaries of the rules governing the CEWS (read our publications here and here). Considering the complexity of these rules, it may not always be easy to ensure that your business is taking advantage of the full CEWS amount that it is entitled to. The purpose of this article is to identify tips and traps to get the best out of the CEWS program. 

Does your business qualify for the CEWS?

There are a number of conditions that must be met in order for an employer to qualify for the CEWS. At the beginning of the program, a minimum revenue reduction was required to claim the CEWS:

Period 1          15%
 Periods 2 to 4  30%
However, for Periods 5 and onwards, any reduction in revenue can give rise to a CEWS claim, subject to all other conditions being met. For these Periods, generally, the higher the revenue reduction, the higher the CEWS rate.

The CEWS rules include deeming rules that can help employers qualify for the CEWS or claim a higher amount of CEWS. In fact, with respect to Periods 1 to 4, if an employer has experienced the required reduction in revenue for a particular Period, this employer is generally considered to have experienced the same revenue reduction for the immediately following Period. Moreover, for Periods 5 and onward, the employer may use the greater of the reduction in revenue experienced in the current Period or in the immediately preceding Period to determine its CEWS rate.

Optimizing your CEWS claim

CEWS eligibility and calculations are largely based on the reduction in revenue that an employer experienced in a claim Period. In general, an employer’s revenue must be calculated pursuant to its normal accounting practices. This general principle is subject to specific CEWS rules. For example, an employer’s revenue for CEWS purposes excludes amounts from extraordinary items, amounts on account of capital and amounts from non-arm’s length persons or partnerships. There are many elections available to provide employers with flexibility in the calculation of revenue. These elections can make a significant difference in the CEWS amount that an employer can claim. The most common elections are as follows:

  • Members of an affiliated group may jointly elect to:
    • Determine their qualifying revenue on a consolidated basis, or
    • If the group already prepares consolidated financial statements, determine their qualifying revenue on a non-consolidated basis.
  • Where 90% or more of an employer’s revenue is from non-arm’s length parties, an election can be filed jointly by the employer and the non-arm’s length parties in order to allow the employer to consider non-arm’s length revenues for the revenue test. An alternative method must then be followed to calculate the employer’s revenue.
  • Entities that use the cash method of accounting can elect to use accrual-based accounting to compute their revenues for the purpose of the CEWS, and vice versa.
  • To determine their revenue reduction, employers can elect to compare the reference month’s revenue with the average of January and February 2020 (the alternative approach), instead of comparing them with the same month of the preceding year (the year-over-year approach).
  • Employers who participated in a transaction to acquire assets from a vendor can elect to transfer some revenues from the vendor to the purchaser of the assets. This election is subject to certain conditions.
  • Employers can take advantage of the deeming rules (see above section “Does your business qualify for the CEWS?”).
  • For Periods 5 and 6, the CEWS can the calculated on the basis of the rules governing Periods 1 to 4, if this is more beneficial to the employer.
  • For Periods 8 to 10, the top-up component of the CEWS can be claimed on the basis of the rate calculated under the rules governing Periods 5 to 7, if this is more beneficial to the employer.

Be careful! Certain elections automatically apply to more than one claim Period upon filing. It is therefore advisable to analyze the benefits of a contemplated election by considering its impact on other claim Periods.

The CEWS rules allow an employer to amend or revoke an election made for the purposes of the CEWS. However, the change must be done on or before the date that the application is due for the first claim Period in respect of which the election is made.

Make sure not to wait too long

CEWS applications (original or amended) must be filed on or before the later of:

  • January 31, 2021, and
  • 180 days after the end of the claim Period.

Some pitfalls to be mindful of

Employees on whose remuneration CEWS can be claimed:  For Periods 1 to 4, the definition of “eligible employee” for whom a CEWS amount can be claimed excludes employees that are without remuneration in respect of 14 or more consecutive days in a claim Period. This rule can impact the CEWS claim with respect to employees who were hired, fired or on temporary leave during a given claim Period.

Definition of remuneration for CEWS purposes: Under the CEWS rules, retiring allowances and stock option benefits must be excluded from the calculation of an employee’s remuneration.

Broad anti-avoidance rules:  The CEWS legislation contains broad anti-avoidance rules to ensure that taxpayers do not abuse this program. Where these rules are found to apply, substantial penalties can be levied by the tax authorities.

Interaction with the 10% Temporary Wage Subsidy:  During any given claim Period, an employer may be eligible for both the CEWS and the 10% temporary wage subsidy.  In such a case, all amounts that the employer claims pursuant to the 10% temporary wage subsidy for remuneration paid in a specific claim Period reduce the amount available to be claimed pursuant to the CEWS in that same Period.

Interaction with other tax credits:  Certain tax credits based on wages, such as the SR&ED tax credit and the multimedia tax credit, will be reduced when a CEWS amount is applied for. This is because the CEWS is to be considered government assistance received with respect to wages, which impacts the determination of the quantum of other tax credits.

Be prepared for a CEWS audit

Employers are expected to maintain adequate books and records as evidence that their CEWS claim is accurate and complete. The Canada Revenue Agency (CRA) has announced that it will review CEWS applications by way of comprehensive post-payment audits.

Upon a CEWS audit, the CRA will request access to extensive documentation within a limited time frame of approximately 10 business days. The CRA does not intend to easily allow more time to provide the requested information, considering that CEWS applications have been recently submitted, since the taxpayer is required to maintain records. Therefore, it would be prudent to meticulously document and organize all supporting information at the time a CEWS application is submitted to the CRA.

To get personalized assistance with your CEWS claim, please consult with your Crowe BGK advisor.